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Fund Review: Emerging Market Debt


Perhaps that’s why the Investment Association (IA) Global Emerging Markets Bond sector has seen net retail sales outflows in the first three months of this year. This is in contrast to the start of 2014, when inflows into the sector peaked at £173m in February.

Within the sector, there are 33 emerging markets debt funds, offered by 24 different providers, according to FE Analytics.

Data from FE Analytics reveals the sector returned 1.08 per cent in the 12 months to May 12, only slightly below the 1.90 per cent generated by the IA Global Bonds sector.

So where are emerging markets debt returns likely to come from this year?

Paul McNamara, manager of the JB Local Emerging Bond fund, suggests global growth and disinflation will be the key drivers of emerging markets in 2015.

He explains: “We expect growth to continue to strengthen, led by developed economies, and global headline inflation to fall on declining commodity prices. Both trends should boost EM [emerging markets] local currencies.

“The main beneficiaries will be the EM exporters of manufactured goods and services that have developed markets as their major export partners. The sweet spot is in the countries with moderate to high inflation, which are less at risk of deflationary pressures.”

For investors in this asset class, the question is whether the debt they invest in should be denominated in local currencies or US dollar, bearing in mind the rising dollar conditions.

Mr McNamara acknowledges: “Front of mind for emerging markets investors is the question of where next for the US dollar, a hard call to make with so much uncertainty around tightening monetary policy.”

Luca Paolini, chief strategist at Pictet Asset Management, says he favours US dollar-denominated EM debt. He reasons: “With yields on benchmark government bonds at unsustainably low levels, the continued monetary stimulus provided by central banks worldwide should disproportionately benefit areas of the fixed income market where valuations are either close to or below fair value.”

According to Mr Paolini, US dollar emerging markets debt has attracted roughly 80 per cent of the investments that have flowed into emerging markets fixed income so far in 2015.

On local currency emerging markets debt, he adds: “Lower interest rates, weak demand for commodities and a slower-growing China will weigh on emerging markets growth for some time, placing downward pressure on many currencies.”

But Mr McNamara states: “Local emerging markets currencies have actually outperformed non-US developed market currencies since early 2014. A strengthening US dollar would trigger better performance in assets priced in local currency.”

He notes that local currency EM debt is not aggressively valued at the moment, calling it “a rare find in today’s fixed income universe”.


Fidelity Emerging Markets Debt

Steve Ellis was appointed to manage this ¤993m (£721.6m) fund in November 2012. It invests primarily in US dollar-denominated EM sovereign debt, although the fund must have at least 70 per cent in EM bonds. Its factsheet notes the EM debt team uses “a range of in-house quantitative tools to capture information specific to emerging markets”. It’s an approach that seems to have paid off as the fund delivered 18 per cent to investors in the three years to May 12 2015, compared to the 2.29 per cent sector average over the same period.

Pimco GIS Emerging Markets Bond

This $4.6bn (£2.9bn) fund is actively managed by Michael Gomez in order to “maximise total return potential and minimise risk relative to the benchmark”. Mr Gomez runs a diverse portfolio comprising issuers in, or economically tied to, emerging or developing countries. The fund is top quartile in the IA Global Emerging Markets Bond sector over five years to May 14, returning 20.71 per cent, compared to the sector average of 5.87 per cent. Performance dropped to second quartile over one and three years but has picked up in recent months, data from FE Analytics shows.


Pictet Global Emerging Debt

This is the second best performing fund in the IA Global Emerging Markets Bond sector over 10 years. It is managed by the EM debt team at Pictet and Simon Lue-Fong, who is head of global EM debt at the firm. This $5.9bn (£3.8bn) fund seeks capital growth “by investing at least two-thirds of its total assets in bonds and other debt instruments issued or guaranteed by national or local governments”, its factsheet states. According to FE Analytics, the fund has returned an impressive 151.20 per cent over 10 years to May 12, against the sector average of 95.58 per cent. The team has maintained that top-quartile performance over one, three and five years.

In this special report